57
Volume 04 Issue 02-2022
The American Journal of Political Science Law and Criminology
(ISSN
–
2693-0803)
VOLUME
04
I
SSUE
02
Pages:
57-64
SJIF
I
MPACT
FACTOR
(2020:
5.
453
)
(2021:
5.
952
)
OCLC
–
1176274523
METADATA
IF
–
7.659
Publisher:
The USA Journals
ABSTRACT
The need for corporate governance comes from separation of powers between ownership and control in large
corporations which are built on each other to protect investors` rights by reducing managerial discretion over business
decisions. Business flourishment is a basis for countries` proper development in terms of capitalism providing that
such prosperity is based on a rational legal system. Affluent nations who were able to form strong institutions to
protect property rights and enforce contracts are far too ahead of developing countries that fail to set up such legal
instruments to eliminate loopholes in their systems thus not being able to enjoy world market opportunities. The legal
systems of the nations, especially those courts who implement law and order among the persons, are said to play an
important role in availing or restricting business activities. In the formation of good corporate governance in the
developed world, historically common law and civil law practices had a lot to say. This article will discover some
peculiarities of both systems.
KEYWORDS
Corporate governance, legal systems, pre-determined goals.
Research Article
CORPORATE GOVERNANCE MAKES COMPANY PERFORM BETTER,
DOESN`T IT?
Submission Date:
February 08, 2022,
Accepted Date:
February 17, 2022,
Published Date:
February 28, 2022
|
Crossref doi:
https://doi.org/10.37547/tajpslc/Volume04Issue02-10
Sagatova Muborak
Master student, Tashkent State University of Law, Uzbekistan
Journal
Website:
https://theamericanjou
rnals.com/index.php/ta
jpslc
Copyright:
Original
content from this work
may be used under the
terms of the creative
commons
attributes
4.0 licence.
58
Volume 04 Issue 02-2022
The American Journal of Political Science Law and Criminology
(ISSN
–
2693-0803)
VOLUME
04
I
SSUE
02
Pages:
57-64
SJIF
I
MPACT
FACTOR
(2020:
5.
453
)
(2021:
5.
952
)
OCLC
–
1176274523
METADATA
IF
–
7.659
Publisher:
The USA Journals
INTRODUCTION
Corporate governance is a tool for handling the
separation of roles between the major players of
business for the sake of long term value creation. There
is ongoing debate over the absence of sufficient
incentives for managers to act in the best interests of
their shareholders who may well lead to low economic
performance through pursuing short term goals.
Performance as the evaluation indicator in this context
is generally defined as achievement of pre-determined
goals and meeting firm`s objectives within the time
limits pre-defined earlier.
1
Managers acting as agents
of the firm`s shareholders assume the responsibility to
balance priority of different stakeholders of the
company, and sometimes have conflicting interests
with the shareholders. Theoretically, best corporate
governance should align expectations of all
stakeholders enabling their voices to be heard and
providing cooperation toward a common goal which
together
forms
the
dynamics
of
corporate
governance.
2
1
DUCA F, “Does Corporate Governance Enhance Firm
Performance?:
An
Empirical
Literature
Evidence”
<https://pdfs.semanticscholar.org/1e28/edab3e9fa94ceadf4
49be18f8130405b7d25.pdf> (accessed 20 February 2020) 53
2
Deloitte – Nyenrode Research Program, ‘Good Governance
driving
Corporate
Performance?’
2016
<https://www2.deloitte.com/content/dam/Deloitte/nl/Docu
ments/risk/deloitte-nl-risk-good-governance-driving-
corporate-performance.pdf > (accessed 20 February 2020)
6
3
Young B, ‘CORPORATE GOVERNANCE AND FIRM
PERFORMANCE: IS THERE A RELATIONSHIP?’ (IVEY Business
Journal
2003)
accessed April 3, 2020.
THE MAIN RESULTS AND FINDINGS
However, in most studies the existence of correlation
between the firm`s performance and managerial
behavior has gained momentum, and in the new
millennia the importance of corporate governance did
not receive enough attention leading to so called crisis
of confidence remarked by the Conference Board’s
Commission on Public Trust and Private Enterprise in
January 2003.
3
Such correlation has contributed to the
emergence of two ambivalent views, more specifically
the lesser is the board size the better is financial
success of the enterprise, meanwhile, better economic
progress is the fruit of boards comprising a lot of
members; both assumptions offer that board size is
the determinant of level of control in the firm.
4
Independence of the directors means there is bigger
proportion of outsiders
5
(Anglo-American model)
which is advised to be strengthened by the
New York
Stock Exchange and Nasdaq standards.
6
At the same
time one research indicated that inside directors have
a priority over outsiders since they have day-to-day
4
Zahroh Naimah and Hamidah, 'The Role of Corporate
Governance In Firm Performance' (2017) 34 SHS Web of
Conferences
<http://repo.uum.edu.my/21077/1/shsconf_four2017%201%20
6ivv.pdf> accessed 1 April 2020. 2-3
5
Ibid
6
Young B, ‘CORPORATE GOVERNANCE AND FIRM
PERFORMANCE: IS THERE A RELATIONSHIP?’ (IVEY Business
Journal
2003)
<https://iveybusinessjournal.com/publication/corporate-
governance-and-firm-performance-is-there-a-relationship/>
accessed April 3, 2020
59
Volume 04 Issue 02-2022
The American Journal of Political Science Law and Criminology
(ISSN
–
2693-0803)
VOLUME
04
I
SSUE
02
Pages:
57-64
SJIF
I
MPACT
FACTOR
(2020:
5.
453
)
(2021:
5.
952
)
OCLC
–
1176274523
METADATA
IF
–
7.659
Publisher:
The USA Journals
operations of the firm which is why are capable of
increasing firm performance.
7
Having analyzed 22 samples, Rhoades et.al testified
considerable correlation between the board structure
and firm performance which demonstrated better
performance in two-tier boards (German model)
compared to that of Anglo-American companies with
CEOs interwoven responsibilities.
8
The companies with
better corporate practices tend to pay out relatively
higher dividends to the shareholders with more valued
shares.
Research conducted with 312 quoted companies of the
UK demonstrated that there were only 41.6% of non-
executive members of the UK boards, and only 16% of
the companies had the same person as CEO and
chairman after this had been recommended by the
Cadbury Report to avoid collecting too much power in
the same hands. But this study failed to prove the
positive interrelation between the CG mechanisms and
company`s
financial
performance
since
such
performance is dependent on different variables other
than CG.
Numbers prove existence of casual link between the
performance and good governance
The importance of corporate governance as a crucial
blueprint for the enhancement of corporate
management rather than a mere compliance code has
7
Stanwick, Peter A., and Sarah D. Stanwick. "The
Relationship between Corporate Governance and Financial
Performance: An Empirical Study." (
The Journal of Corporate
Citizenship
, 8 2002): 35-48. accessed April 3, 2020.
<www.jstor.org/stable/jcorpciti.8.35.>
8
DUCA F, “Does Corporate Governance Enhance Firm
Performance?:
An
Empirical
Literature
Evidence”
<https://pdfs.semanticscholar.org/1e28/edab3e9fa94ceadf4
49be18f8130405b7d25.pdf> (accessed 20 February 2020).
found its empirical base in one of the recent findings
that included 350 companies operating in 10 sectors in
10 sectors namely,
Basic materials, Consumer goods,
Consumer services, Financial services, Healthcare,
Industrials, Telecoms, Technology, Oil and gas and
Utilities
in the time frame from 1996-2012
.
This study
testified that proper code of corporate governance
implemented in the business adds value to financial
indicators occurring not less than 70%. The UK Code of
CG as a mother of more than 100 similar codes across
the Globe, when complied with helps enterprises to
become 29% efficient at making profits and 43% better
at selling products, with top companies doubling share
returns to their shareholders. These outcomes are of
strategic importance to those who earlier criticized CG
as something to be tolerated with. It was also
identified that low-performing companies had better
financial performance as they improved their CG. When
compared with companies that had poor corporate
management systems, top quartile companies showed
90% of probability of outperforming the former in
generating value for stockholders in terms of free cash
flow. The research concluded that when corporate
governance is applied in key areas (
business model
clarity and connectivity, culture and value integration,
risk
management,
internal
controls,
board
effectiveness and succession planning
) there is a
stronger likelihood of creating a dynamic atmosphere
with subsequent improved decision making in the
business.
9
9
Bell S, ‘
Corporate governance and company performance
A proven link between effective corporate governance and
value
creation’,
(Grant
Thornton
2019)
<https://www.grantthornton.co.uk/globalassets/1.-member-
firms/united-kingdom/pdf/documents/corporate-
governance-and-company-performance.pdf > accessed 10
March 2020. 10-14
60
Volume 04 Issue 02-2022
The American Journal of Political Science Law and Criminology
(ISSN
–
2693-0803)
VOLUME
04
I
SSUE
02
Pages:
57-64
SJIF
I
MPACT
FACTOR
(2020:
5.
453
)
(2021:
5.
952
)
OCLC
–
1176274523
METADATA
IF
–
7.659
Publisher:
The USA Journals
Meanwhile, the sample of 270 companies of German
origin for the period from 2000-2006 years was studied
in terms of their performance measures, ownership
structure and board characteristics, ownership
structure instruments and control. The study revealed
that concentrated ownership does not itself impact on
the level of performance due to its having various
types. As insider ownership firms, German companies
incur higher level of agency costs since outside
minority shareholders face difficulties monitoring
insiders resulting in negative effect on performance.
One of the profound findings of the research was to
prove the positive link between the presence of
institutional shareholders in the company and its
performance pushing companies there to promote
cross listing to attract investors. It also re-supported
the earlier view that companies with few outsiders in
their supervisory boards are significantly more likely to
outperform those with higher portion of outsiders in
the boards.
10
Apparently, corporate governance system is not an
only indicator of firm`s success in financial terms. But
many scholars have proved the existence of the link
between corporate governance and firm performance.
When shareholders are positive about laws that can
10
Ivashkovskaya Irina and Zinkevich Nadezhda, ‘The
relationship between corporate governance and company
performance in concentrated ownership systems: The case
of Germany’ (Journal Korporativniye Finansi 12 2009)
<file:///C:/Users/My%20Pc/Downloads/1650-%D0%A2%D0%B5%
D0%BA%D1%81%D1%82%20%D1%80%D1%83%D0%BA%D0%BE%D0
%BF%D0%B8%D1%81%D0%B8-3096-1-1-20161221.pdf> accessed
15 March 2020 15-18
11
Hans-Bernd Schäfer and Hüseyin Can Aksoy, 'Good Faith'
[2015]
Encyclopedia
of
Law
and
Economics
<http://file:///C:/Users/My%20Pc/Downloads/Encyclopediago
odfaith.pdf> accessed 5 February 2020.
make their directors to work in good faith
11
they will
invest more, also managers who are assured that there
will not be litigation abuse against them can pursue
company goals more efficiently.
English directors are satisfied with their codes, but
are Germans?
In order to explore the attitudes of companies to
corporate governance and it being codified, 48
interviews conducted with legal advisors as well as
senior directors of German companies and secretaries
of the UK companies are analyzed. Codes taken to
regulate corporate behavior are UK Corporate
Governance Code 2018 (developed from the original
Cadbury Report every time with some additions
12
) for
the UK and Cromme Code for Germany. The former is
said to be voluntary comply-or-explain provided that
proper justification is provided for non-compliance,
while the latter contains both soft law and hard law as
well as aspirations which is not either binding or
requires explanation for not being complied with
13
.
Based on the extracts from the interviews appended in
the research many UK companies are assured that
code of corporate behavior reflects best practices
evolved within the companies.
14
Each development of
12
Corporate Governance In Commonwealth Countries:
Corporate Governance in the United Kingdom Chapter
16 (International Centre for Research in Accountability and
Governance
2019).
<https://www.researchgate.net/publication/332694263_Cor
porate_Governance_in_the_United_Kingdom> accessed 15
February 2020
13
Sanderson and others, (Centre for Business Research,
University of Cambridge, Working paper No. 407, 2010)
<https://www.cbr.cam.ac.uk/fileadmin/user_upload/centre-
for-business-research/downloads/working-
papers/wp407.pdf> accessed 15 February 2020. 2-3
14
Ibid 5
61
Volume 04 Issue 02-2022
The American Journal of Political Science Law and Criminology
(ISSN
–
2693-0803)
VOLUME
04
I
SSUE
02
Pages:
57-64
SJIF
I
MPACT
FACTOR
(2020:
5.
453
)
(2021:
5.
952
)
OCLC
–
1176274523
METADATA
IF
–
7.659
Publisher:
The USA Journals
the rules was highly in response to the changes in
corporate needs of the time where domination was
taken by major players not the government. German
firms, on the other hand, do not feel their ownership
over the Code since they believe that German code of
good management was developed in response to
recourse by foreign needs. One of the interviewees
stated that the main concern of the governmental
commission was to demonstrate Germany as a better
place for foreign investors which made the code
unattainable for some. Government in its term failed to
provide cross-section participation in drafting for it
was under pressure from Anglo-Saxon media that
propagated Germany as a developing country in terms
of corporate governance.
15
When entities do not feel
involved in the adoption of laws that directly influence
them they will not feel a degree of appreciation to the
legal framework surrounding them. So is the case with
Germany which passed such regulation in a relatively
shorter time and letting small companies feel under-
represented as well as putting bureaucracy on bigger
businesses. Small companies simply see corporate
governance as something not designed for them but
rather as a marketing tool to push Germany into
financial market. While top companies commented it
as not democratic and drawn by someone who has
never been inside the business. Moreover, new
millennium recorded 300 percent more turnover of
CEOs in North America, Europe and Asia which was
claimed to have a strong link with shareholders being
dissatisfied with comparatively low returns on shares.
Because, when these forced dismissals happened
performance rate was 7.7% lower compared with the
15
ibid
16
Lucier and others, ‘CEO Succession 2004 The World`s Most
Prominent Temp Workers’, (Booz & Company 39 2005) <
https://www.strategy-
business.com/media/file/sb39_05204.pdf > accessed 15
February 2020. 5
years when CEOs left with usual reasons such as
retirement, poor health or other conditions. This
period has been described as short-termism with
frequent changes in CEO position. Also, formers CEOs
are blamed for dragging the company back when
appointed as chairman.
16
Deviations from rules are not always justifiable
Numbers demonstrated supporting results for the
views mentioned about the UK and Germany. With 257
listed companies studied, there were 750 deviations
from the rules established in those codes in 2006. The
success of the application of the Codes is dependent
on the integrity between the shareholders and
managers who should understand importance but
keep in mind that one does not fit all and there is
always room for reasonable non-compliance. To study
the compliance rate in maximum equal terms only
recommendations part of the Cromme Code was taken
excluding those parts of full compliance and parts that
are merely suggested without insistence on
explanation in case of non-compliance. According to
research UK companies with high performing
characteristics were on top quartile of compliance;
FTSE top 30 recorded 66.67 conformance with the
Code, and 20 of which were in 100 percent conformity
with the recommendations. German companies listed
on Dax 30, MDax and SDax 50 each were studied based
on their annual reports which showed only 18 full-
compliance (14.06%) with 4.40 average number of
deviations (in the UK it was 0.60).
17
The provisions with
which UK companies least complied was regarding not
17
Seidl and others, ‘Applying “comply-or-explain”:
Conformance with Codes of Corporate Governance in the UK
and
Germany’
<
https://www.researchgate.net/publication/228429847>
accessed 10 January 2020. 14-15, 20-21
62
Volume 04 Issue 02-2022
The American Journal of Political Science Law and Criminology
(ISSN
–
2693-0803)
VOLUME
04
I
SSUE
02
Pages:
57-64
SJIF
I
MPACT
FACTOR
(2020:
5.
453
)
(2021:
5.
952
)
OCLC
–
1176274523
METADATA
IF
–
7.659
Publisher:
The USA Journals
having the same person on positions of CEO and
Chairman which was said to threaten independence of
the Board.
18
Even though above study demonstrated
significant differences in compliance rates of the two
countries, there are some points to consider. German
code of good governance is relatively new adopted a
decade later than its British fellow which means
German companies may be in the process of adoption.
Moreover, the huge gap between the numbers of
provisions complied in the UK and Germany can be
accounted for the difference between total numbers
(82 provisons in Cromme code while only 48 in the UK,
almost twice less). However, most intriguing feature in
the study is that whether such numbers of non-
compliance is showing flexibility of the code that was
initially intended or it is just the mask under which
managers are pursuing their own interests. Since, the
main target behind the composition of the codes was
to protect shareholders` interests, the only way seems
to explore into what was indicated in the reports as
explanation for deviations which still may not
correspond to actual motives of the directors. This has
been indicated as the limitation of the research. We are
only able to make approximate assumptions based on
the numbers to choose a better code for compliance
from experienced practitioners of the sphere. When
Oxera conducted research on behalf of London Stock
Exchange the UK corporate governance code was one
of the factors encouraging companies to choose the
UK over the US.
19
This reinforces the view that the UK
corporate mechanisms are comparatively favoured
regardless of possible dishonest deviations by
directors.
18
Maassen, 2002. Corporate governance UK p5. Indeed,
studies have shown that in terms of return of equity, ROI and
profit margin, the firms with independent leadership clearly
outperformed the once with CEO-duality.
CONCLUSION
This paper is only a shallow analysis of the topic. There
are many factors surrounding and influencing this
phenomenon worldwide. Corporate governance based
on international standards is effective tool for
transition countries to step toward a market based
economy. Therefore, corporate governance has strong
ties with the development of business strategy in a
right way considering the interests of main
participants. I want to finish my work with the famous
quote by
Alexander Pope
:
For forms of Governance let fools contest,
Whatever is best administered is best.
REFERENCES
1.
DUCA F, “Does Corporate Governance Enhance
Firm Performance?: An Empirical Literature
Evidence”
<https://pdfs.semanticscholar.org/1e28/edab3e9f
a94ceadf449be18f8130405b7d25.pdf> (accessed
20 February 2020) 53
2.
Deloitte – Nyenrode Research Program, ‘Good
Governance driving Corporate Performance?’ 2016
<https://www2.deloitte.com/content/dam/Deloitt
e/nl/Documents/risk/deloitte-nl-risk-good-
governance-driving-corporate-performance.pdf >
(accessed 20 February 2020) 6
3.
Young B, ‘CORPORATE GOVERNANCE AND FIRM
PERFORMANCE: IS THERE A RELATIONSHIP?’
(IVEY
Business
Journal
2003)
<https://iveybusinessjournal.com/publication/cor
19
Financial Reporting Council, ‘The UK approach to
Corporate
Governace’
[2006]
<
https://www.frc.org.uk/getattachment/8cd9bbbb-9c3f-
46ae-83f1-f915b9cfb028/UK-approach-to-corporate-
governance-2006.pdf> accessed 10 January 2020. 8
63
Volume 04 Issue 02-2022
The American Journal of Political Science Law and Criminology
(ISSN
–
2693-0803)
VOLUME
04
I
SSUE
02
Pages:
57-64
SJIF
I
MPACT
FACTOR
(2020:
5.
453
)
(2021:
5.
952
)
OCLC
–
1176274523
METADATA
IF
–
7.659
Publisher:
The USA Journals
porate-governance-and-firm-performance-is-
there-a-relationship/> accessed April 3, 2020.
4.
Zahroh Naimah and Hamidah, 'The Role of
Corporate Governance In Firm Performance'
(2017)
34
SHS
Web
of
Conferences
<http://repo.uum.edu.my/21077/1/shsconf_four20
17%201%206ivv.pdf> accessed 1 April 2020. 2-3
5.
Ibid
6.
Young B, ‘CORPORATE GOVERNANCE AND FIRM
PERFORMANCE: IS THERE A RELATIONSHIP?’
(IVEY
Business
Journal
2003)
<https://iveybusinessjournal.com/publication/cor
porate-governance-and-firm-performance-is-
there-a-relationship/> accessed April 3, 2020
7.
Stanwick, Peter A., and Sarah D. Stanwick. "The
Relationship between Corporate Governance and
Financial Performance: An Empirical Study." (The
Journal of Corporate Citizenship, 8 2002): 35-48.
accessed
April
3,
2020.
<www.jstor.org/stable/jcorpciti.8.35.>
8.
DUCA F, “Does Corporate Governance Enhance
Firm Performance?: An Empirical Literature
Evidence”
<https://pdfs.semanticscholar.org/1e28/edab3e9f
a94ceadf449be18f8130405b7d25.pdf> (accessed
20 February 2020).
9.
Bell S, ‘Corporate governance and company
performance A proven link between effective
corporate governance and value creation’, (Grant
Thornton
2019)
<https://www.grantthornton.co.uk/globalassets/1
.-member-firms/united-
kingdom/pdf/documents/corporate-governance-
and-company-performance.pdf > accessed 10
March 2020. 10-14
10.
Ivashkovskaya Irina and Zinkevich Nadezhda, ‘The
relationship between corporate governance and
company performance in concentrated ownership
systems: The case of Germany’ (Journal
Korporativniye
Finansi
12
2009)
<file:///C:/Users/My%20Pc/Downloads/1650-
%D0%A2%D0%B5%D0%BA%D1%81%D1%82%20%D1%80
%D1%83%D0%BA%D0%BE%D0%BF%D0%B8%D1%81%D
0%B8-3096-1-1-20161221.pdf> accessed 15 March
2020 15-18
11.
Hans-Bernd Schäfer and Hüseyin Can Aksoy, 'Good
Faith' [2015] Encyclopedia of Law and Economics
<http://file:///C:/Users/My%20Pc/Downloads/Encyc
lopediagoodfaith.pdf> accessed 5 February 2020.
12.
Corporate
Governance
In
Commonwealth
Countries: Corporate Governance in the United
Kingdom Chapter 16 (International Centre for
Research in Accountability and Governance 2019).
<https://www.researchgate.net/publication/3326
94263_Corporate_Governance_in_the_United_Ki
ngdom> accessed 15 February 2020
13.
Sanderson and others, (Centre for Business
Research, University of Cambridge, Working
paper
No.
407,
2010)
<https://www.cbr.cam.ac.uk/fileadmin/user_uplo
ad/centre-for-business-
research/downloads/working-papers/wp407.pdf>
accessed 15 February 2020. 2-3
14.
Ibid 5
15.
ibid
16.
Lucier and others, ‘CEO Succession 2004 The
World`s Most Prominent Temp Workers’, (Booz &
Company 39 2005) < https://www.strategy-
business.com/media/file/sb39_05204.pdf
>
accessed 15 February 2020. 5
17.
Seidl and others, ‘Applying “comply-or-explain”:
Conformance
with
Codes
of
Corporate
Governance in the UK and Germany’ <
https://www.researchgate.net/publication/22842
9847> accessed 10 January 2020. 14-15, 20-21
18.
Maassen, 2002. Corporate governance UK p5.
Indeed, studies have shown that in terms of return
of equity, ROI and profit margin, the firms with
64
Volume 04 Issue 02-2022
The American Journal of Political Science Law and Criminology
(ISSN
–
2693-0803)
VOLUME
04
I
SSUE
02
Pages:
57-64
SJIF
I
MPACT
FACTOR
(2020:
5.
453
)
(2021:
5.
952
)
OCLC
–
1176274523
METADATA
IF
–
7.659
Publisher:
The USA Journals
independent leadership clearly outperformed the
once with CEO-duality.
19.
Financial Reporting Council, ‘The UK approach to
Corporate
Governace’
[2006]
<
https://www.frc.org.uk/getattachment/8cd9bbbb
-9c3f-46ae-83f1-f915b9cfb028/UK-approach-to-
corporate-governance-2006.pdf> accessed 10
January 2020. 8
